Citation
Dr.
Shubham Dilip Gaud
V.V. M’s,
S.G. P. Arts, Science and Commerce College, Sakri (Dist.Dhule)
Email-shubhamgaud010@gmail.com
Abstract
Tax reforms in India have been a continuous process
shaped by economic goals, fiscal consolidation, compliance challenges, and
global trends. This paper systematically analyzes reforms in India’s direct and
indirect tax systems — focusing on the Income-tax Act of 1961, structural
changes across decades, the landmark introduction of the Income Tax Act, 2025,
and changes in indirect taxes like GST. Using historical context, policy
analysis, numerical trends, and conceptual diagrams, this study assesses
the efficacy of reforms in revenue mobilisation, taxpayer base expansion, and
compliance simplification.
1.
Introduction
Tax policy is a cornerstone of fiscal governance,
impacting redistribution, revenue generation, and economic growth. India’s tax
reforms since independence have sought to balance revenue needs with efficiency
and fairness. The Income-tax Act of 1961 governed direct taxes for more
than six decades, undergoing numerous amendments to adapt to structural
changes. In 2025, the Parliament passed the Income-tax Act, 2025 to
replace the 1961 framework with a simplified law designed for modern compliance
and reduced litigation.
2.
Historical Evolution of Tax System in India
2.1
Income-tax Act, 1961: Foundation of Direct Tax Law
The Income-tax Act, 1961 became effective on
1 April 1962 and provided a consolidated legal framework for levy,
administration, and recovery of income tax in India. It categorised income
sources, established progressive tax rates, and detailed assessment procedures.
Key characteristics:
- Progressive tax structure with exemptions,
deductions, and rebates.
- Extensive provisions for compliance,
assessments, and appeals.
- Regular amendments through annual Finance Acts
to adjust tax slabs, deductions, and incentives.
2.2
Stages of Reform (1961–2025)
Diagram 1 — Evolutionary Timeline
of Tax Reforms
- 1961–1980s: Administrative
consolidation and institutional strengthening.
- 1991–2000: Liberalisation era —
rationalisation of tax rates & broader tax base.
- 2000–2010: Digitisation begins —
E-filing, TDS expansion.
- 2010–2020: Modernisation — faceless
assessments, compliance systems.
- 2020–2025: Structural reforms, new tax
regimes, Income Tax Act, 2025 enactment.
Each phase responded to economic and administrative
imperatives — from post-independence consolidation to globalisation, digital
governance, and simplification.
3. Direct
Tax Reforms
3.1 Tax
Slab Changes and Thresholds
Figure 1
— Income Tax Basic Exemption Timeline (₹)
|
Year |
Basic Exemption Limit |
|
1995 |
40,000 |
|
2005 |
1,10,000 |
|
2014 |
2,00,000 |
|
2019 |
5,00,000 |
|
2023 |
7,00,000 |
|
2025 |
12,00,000 |
In 2025, with a standard deduction of ₹75,000,
effective tax-free income reached ₹12.75 lakh. This progressive relaxation has
reduced the personal tax burden over time.
3.2 New
Tax Regime
In 2020, the government introduced an optional
new tax regime (Section 115BAC) — lower tax rates with fewer
exemptions/deductions — to simplify compliance and reduce tax planning
complexity. The 2025 revisions further increased rebate limits, expanding
relief for middle-income earners.
3.3 Abolition of Wealth Tax
The Wealth Tax Act, 1957 was repealed in 2016;
a surcharge replaced it on high net-worth incomes to streamline direct
taxation.
4.
Structural Overhaul: Income-tax Act, 2025
4.1
Rationale for Reform
By the 2020s, the 1961 Act had become lengthy and
complex due to incremental amendments. This led to litigation, compliance
challenges, and enforcement friction. The Income Tax Bill, 2025 was introduced
to simplify, modernise, and codify tax administration.
Diagram 2 — Structural Comparison
(1961 vs 2025)
- Income-tax Act, 1961:
~800+ sections, complex provisions.
- Income-tax Act, 2025: 536
sections, organised for clarity and reduced redundancy.
4.2 Key
Features
- Unified Tax Year:
Replaces separate “Previous Year” and “Assessment Year” concepts.
- Simplified language:
Reduction in interpretational ambiguity.
- Technology alignment:
Faceless assessments, e-filing, automated compliance processes.
- Clarity in digital asset taxation:
Explicit provisions for virtual assets.
These changes aim to improve voluntary
compliance and reduce disputes.
5.
Indirect Tax Reforms: GST and Broader Impact
5.1 GST
Introduction
The One Hundred and First Amendment (2016)
led to GST implementation on 1 July 2017, replacing multiple indirect
taxes like VAT, service tax, and excise. This simplified the indirect tax
structure and improved revenue integration across states.
5.2
Recent GST Rationalisation
In 2025, India adopted further GST reforms,
consolidating rate slabs to simplify compliance — evidence of continued tax
system rationalisation.
6.
Numerical Trends, Tax Revenue and Compliance Metrics
6.1
Direct Tax Revenue Growth
Chart 1 —
Nominal Direct Tax Revenue (FY 2019–25)
(Indicative figures — approximate)
|
Fiscal
Year |
Net Direct Tax Revenue (₹ lakh crore) |
|
2019–20 |
11.5 |
|
2020–21 |
9.6 |
|
2021–22 |
13.2 |
|
2022–23 |
15.0 |
|
2023–24 |
17.5 |
|
2025–26* |
12.92 (up 7% YoY as of Nov 2025) |
2025–26 data as of Nov 2025.
This trend shows resilient growth in direct taxes,
reflecting compliance improvements and base expansion.
6.2
Tax-to-GDP Ratio
India’s overall tax-to-GDP ratio reached 19.6%
in 2026, indicating stronger revenue mobilisation and better compliance —
comparable to many emerging markets.
Diagram 3
— Tax-to-GDP Ratio (2010–2025)
(Represented as a line graph)
2010: ~15% ▸ 2015: ~16.5% ▸ 2020: ~17.5% ▸ 2025:
~19.6%
7.
Analytical Insights
7.1
Efficiency vs Equity
While reforms improved compliance and broadened tax
bases, critics argue that a very small percentage of the population pays
direct tax (e.g., ~2–3%) — raising equity concerns.
7.2
Compliance Friction Reduction
Digitisation and faceless processes have
significantly reduced administrative friction — an important but often
overlooked “hidden tax” cost.
8. Policy
Implications and Future Directions
- Further base widening:
Enhancing compliance harnesses revenue without raising rates.
- Progressivity and fairness:
Ensuring a broader share of income groups contribute equitably.
- Digital innovation:
Continued investment in technology can improve enforcement and
transparency.
- Global alignment: Tax
policies need to respond to cross-border challenges like digital economy
taxation.
9.
Conclusion
India’s tax reform journey from the Income-tax Act,
1961 to the Income Tax Act, 2025 has been transformative — marked by structural
simplification, digital integration, and policy shifts towards taxpayer ease.
Numerical and ratio trends indicate stronger revenue mobilisation and enhanced
compliance, reflecting the cumulative impact of reforms across decades.
Continued focus on equitable tax incidence and administrative efficiency will
be key to India’s future fiscal stability and economic growth.
References
- Income-tax Act, 1961 and
its evolution.
- Income-tax Act, 2025
reforms and features.
- IJLLR analysis on Indian tax policy reforms.
- 2025 Union Budget tax changes.
- Direct tax revenue trends.
- Tax-to-GDP ratio.
- GST introduction and rationalisation.
